THE NEW MORTGAGE LAW, ALMOST A REALITY

These are some of the main measures contained in the real estate credit law, which Congress approved this Thursday. From the moment the law is effective, so will be the mortgage contracts.

Entry into force. By an amendment of Citizens approved this Thursday by Congress, the new real estate credit law will enter into force three months after publication in the BOE, instead of the 30 days provided for in the original text. On the contrary, has been rejected another amendment, this time the PP, which not only provided for the entry into force to three months, but also made the effectiveness of the new cost sharing between bank and customer subject to future regulatory development.

Evaluation of the client’s solvency. Beyond very detailed rules on the information that banks have to provide to the customer about the mortgage, the legislator also imposes an obligation on the institution to assess its solvency “in depth”. Among other elements, the bank should take into account the use of the potential mortgagee, his or her present income and the income he or she will presumably have during the life of the loan, the assets he or she will eventually hold, his or her savings, fixed costs and commitments already assumed. “Likewise, the foreseeable level of income to be received after retirement will be assessed”, in the event that the loan continues to be repaid after the end of the borrower’s working life, the regulations read.

The new law adds that the solvency assessment will not be based on the value of the mortgaged asset exceeding the amount of the loan, i.e. the initial contribution to the purchase by the debtor. Nor in the expectation that the property will increase in value in the future, except if the loan is granted for the construction or renovation of real estate for residential use.

Apportionment of expenses. The regulation passed this Thursday explicitly states who is responsible for paying the costs associated with the mortgage. Except for the appraisal, which has to be paid by the owner of the loan, all others are borne by the bank: agency, notary fees for the deed, registration in the land registry and AJD tax.

This tribute, paid for formalizing a mortgage, created a big stir this fall, when the Supreme Court, with a controversial decision, reversed a ruling it had previously pronounced, and dictated that it had to be paid by the client and not the bank. The Government then approved a decree that put an end to the issue, imposing that it was the financial institutions who paid the AJD. A PP amendment approved by the Senate abolished the tax in the event that a first home was mortgaged, but this modification has been rejected by Congress.

Opening commission. Under the new law, the bank may charge a fee only for services actually rendered or expenses that can be credited, and only if they have been requested or accepted by the customer. When an opening commission is agreed between the lender and the borrower, it must include in a single payment “the total cost of studying, processing or granting the loan or other similar”. In the case of a mortgage in another currency, this commission will also include any charge for the exchange of currency in the initial disbursement.

Floor clause. The new law states that “in operations with variable interest rate may not set a limit down the rate,” thus closing the door to return the so-called floor clauses, which courts have annulled for abusive on many occasions. In any case, to prevent an entity to pay for borrowing money, the regulations also dictate that “the interest rate can not be negative. In other words, when the reference index (such as the Euribor) is negative and it is the case that it exceeds the differential that is charged.

Likewise, according to the regulations approved by Congress on Thursday, the loan reference index must be “clear, accessible, objective and verifiable by the parties”, and must not be “susceptible to influence” by the entities. It seems evident the legislator’s attempt not to allow the use of reference indices such as the IRPH, whose alleged lack of transparency and permeability to manipulation are now subject to the judgment of the Court of Justice of the European Union (ECJ).

Early repayment of a fixed mortgage. The holder of a fixed-rate mortgage may wish to repay all or part of his debt in advance, in order to obtain a reduction in the cost of the loan (capital to be repaid, interest and other expenses such as related insurance). In this case, the legislator establishes two types of commission to be charged for it, according to the period of the contract in which the client returns all or part of the money lent in advance. If it does so within the first 10 years of validity or from the day on which the fixed rate is applicable, the commission will be limited to 2% of the capital repaid in advance. If the advance repayment is made at a later time, the limit of the commission would be 1.5%. Congress refused to accept an amendment voted in the Senate and pushed by the PP, whereby these percentages would have been raised to 4% and 3%, respectively.

Advance repayment of a variable mortgage. As in the case of a fixed-rate loan, in the case of a variable mortgage the holder will pay a commission for repaying it early. The law establishes that the entity and the client may negotiate the amount of this commission, but with these mutually exclusive limits: or up to 0.15% of the capital repaid in advance, if the early repayment is made during the first five years of the contract, or up to 0.25% if it is made during the first three years. “In cases other than these, the bank “may not charge compensation or commission for repayment or early redemption in whole or in part”, the regulations state.

Interest on arrears. This is the interest that the bank may charge on the principal of the loan that the customer has failed to pay. The Supreme Court, when judging the excessive default interest that used to be agreed on mortgages a few years ago, and that could reach up to 25%, dictated that these should not exceed by more than two percentage points the interest rate agreed in the contract. Now the law states that the interest on arrears will be the interest on the loan “plus three points”.

Foreclosure. In order for the bank to be able to foreclose, that is, to terminate the contract in advance of the scheduled deadline and to take the asset as security for the loan, the holder must have failed to pay his instalments. Currently the default threshold is three monthly instalments, although the ECJ has already determined that the unpaid amount should be more important for the early maturity of the mortgage to begin. Therefore, the new amounts foreseen by the new law are 3% of the capital granted or an amount of money corresponding to 12 monthly instalments, if the default occurs in the first half of the duration of the mortgage; and 7% of the loan or the equivalent of 15 monthly payments, when the default occurs in the second half.

Although the law explicitly provides that its rules are not applicable to contracts signed before its entry into force, these amounts will be used in old loans that contain specific early maturity clauses. An amendment by the Socialist Group, accepted this Thursday by the majority of Congress, leaves it up to the debtor to establish whether these clauses contained in his contract are more favourable to him or whether he prefers to take advantage of the new regime.

Related products. A common practice that banks have so far used to lower variable interest rate spreads is to sell linked products such as insurance to the customer. Generally speaking, the new regulations prohibit this, although they allow the bank to require its clients to take out insurance such as the guarantee of compliance with their obligations or damage to the mortgaged property, among others. If this were the case, the financial institution would undertake, however, to accept the alternative policies proposed by the client and which have equivalent conditions and benefits.

On each renewal of the policy, the client shall have the power to propose alternatives, for the analysis of which the financial institution may not charge any commission. If he accepts the offer of any insurance provider proposed by the client, this will not be a reason to worsen the conditions of the loan. The entity lending the money may also link the mortgage to the fact that the holder of the credit, his spouse or unmarried partner, or a relative, contracts certain financial products authorized by the Ministry of Economy, “provided that they serve as operational support or guarantee for the operations and that the debtor and the guarantors receive precise and detailed information” about them.

Multi-currency mortgage. The holder of a loan may convert it into an alternative currency which is the currency in which he receives most of the income or has most of the assets with which he repays it, or which is the currency of the Member State in which he was resident at the time of signing or applying for conversion. The exchange rate with the euro shall, from the start, be that of the ECB on the date of application, unless the contract provides otherwise. The bank shall be obliged to inform the client periodically of any increase in the exchange rate and of the mechanisms applicable to reduce this risk. In any event, it must do so each time the fee differs by more than 20% from the amount that the customer would have paid if the exchange rate in force on the date of signature had been applied.

Law enforcement. To avoid any doubt about the possible retroactivity of the new regulations, the text of the Real Estate Credit Law makes it clear that it will not apply “to loan contracts entered into prior to its entry into force”, with the important exception, already noted, of those containing early maturity clauses. The principle of non-retroactivity will also be repealed in the case of novation or subrogation intervening after the entry into force of the new regulations.

Source: El País